25 April 1990 Income Tax Severed Letter AC59789 - Acquisition of Control of Corporation

19(1)                        5-9789
                                    Firoz Ahmed
                                    (613) 957-2092

APR 25 1990

Dear Sir:

Re: Paragraph 111(4)(e) of the Income Tax Act (Canada) (the "Act")

This is in response to your letter of March 15, 1990 in which you requested our views as to the application of paragraph 111(4)(e) and subsection 111(5.1) of the Act to the hypothetical situation described herein.

Assume that control of a corporation is acquired and, at the time of the acquisition of control of the corporation owns a depreciable property, within the meaning of paragraph 13(21)(b) of the Act, of a prescribed class which has the characteristics described below (the "property"). Assume also that the corporation does not own any other property of that prescribed class. The original cost of the property was $350,000, its fair market value at the time that control is acquired is $325,000 and the undepreciated capital cost ("UCC"), within the meaning of paragraph 13(21)(f), of the class is $295,000. The corporation would file an election under paragraph 111(4)(e) of the Act in respect of the property.

Opinions

We agree with your conclusion that the corporation will be deemed, by paragraph 111(4)(e), to have disposed of the property for proceeds of disposition equal to the greater of the adjusted cost base of the property to the corporation and the fair market value of the property (or such lesser amount as designated by the corporation in the election under paragraph 111(4)(e)). By virtue of subparagraph 54(a)(i), the adjusted cost base of the property would be its capital cost, or $350,000. Thus the corporation would be deemed to have disposed of the property for proceeds of disposition of $350,000 notwithstanding that this is in excess of the fair market value of the property at the time control is acquired.

We also agree that the property would be deemed to be disposed of at the time which is immediately before the time that is immediately before the time that control of the corporation is acquired and would be deemed to be reacquired by the corporation, at a cost of $350,000, at the time control is acquired.

Finally, we are also in agreement with your view that subsection 111(5.1) of the Act would not apply to reduce the UCC of the class even though such UCC would exceed the fair market value of the property of that class immediately after the deemed reacquisition of the property. The reason for this, as you suggest, is that subsection 111(5.1) of the Act only applies where the UCC of a class exceeds the fair market value of the property in the class immediately before the acquisition of control of the corporation.

In this case, at such time the corporation would not have any property in the class because it would be deemed, by paragraph 11(4)(e), to have disposed of the property immediately before such time and not to have reacquired the property until the time that control of the corporation was acquired.

We note that we do not believe that it was intended that property could be deemed, under paragraph 111(4)(e), to be disposed of for proceeds of disposition in excess of the fair market value thereof and we intend to notify the Department of Finance of this anomalous result.

Yours truly, for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch